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Aug 3 (Reuters) - North America's biggest retail supplier of farm products and services, Agrium Inc , reported a 20 percent rise in quarterly profit amid strong demand for crop inputs, but analysts said the severe U.S. drought presents downside risks for the company.
National Bank Financial cut Agrium's rating to "underperform" from "sector perform" on Friday, following a downgrade on Thursday by Dahlman Rose and Co. Agrium reported its second-quarter results on Thursday.
"Management is optimistic about prospects given the rally in grain prices, though there is risk that nutrient demand could be muted near term if the U.S. drought persists into the fall," National Bank analyst Robert Winslow said in a note to clients.
"With much more apparent downside risk than upside for grains, we argue the next few quarters of fertilizer demand/pricing will be as good as it gets this cycle."
Dahlman Rose analyst Charles Neivert said he is turning cautious and downgraded both Agrium and rival Potash Corp of Saskatchewan Inc to "hold" from "buy" on Thursday.
"The upside in the 2013/2014 crop has largely played out and drought conditions introduce a multitude of downside risks which outweigh the rewards in our view," he wrote to clients.
Agrium shares were up 1.4 percent to $95.50 in premarket trading. The stock has gained about 40 percent this year, following skyrocketing corn prices.
The drought in the U.S. Midwest has scorched developing corn and soybean crops, causing grain prices to skyrocket, often pulling up fertilizer stocks with them.
In the short term, the drought will solidify demand for crop inputs in the 2012 second half, said Agrium Chief Executive Mike Wilson.
"We expect high crop prices and tight grain inventories to create significant support for international nutrient demand in the coming year, as growers globally are expected to expand acreage and optimize application rates," he said.
Calgary, Alberta-based Agrium reported its quarterly results late Thursday night, following news that U.S. fertilizer producer CF Industries Holdings Inc had struck a deal with Glencore International Plc to buy Viterra Inc's minority stake in Canada's largest nitrogen fertilizer plant, Canadian Fertilizers Ltd.
The deal gives CF full control of the Medicine Hat, Alberta, plant and replaces a previous deal in which Glencore planned to sell the stake to Agrium, which had raised competition concerns among Canadian farmers.
Early this year, Glencore agreed to acquire all of the outstanding shares of Viterra in a deal valued at C$6.1 billion.
With less money tied up in acquisitions, Agrium said on Thursday that it would spend $900 million to buy back shares.
Last week Potash Corp reported a 38 percent drop in second-quarter profit, hurt by a writedown of its investment in a Chinese fertilizer maker.
Agrium, also one of the world's top producers of nitrogen-based fertilizers like urea and ammonia, is investing about $1.5 billion to expand its potash production capacity and capitalize on rising demand for the crop nutrient.
Agrium's net earnings for the second quarter rose to $860 million, or $5.44 per share, from $718 million, or $4.54 per share, a year ago.
Earnings per share were within the outlook it offered on July 18 of $5.40 to $5.50.
Revenue rose 10 percent to $6.83 billion.